Global Recorded Music

Introduction:

The $32-billion music recording industry was dominated by four multinational corporations, and they accounted for 86% of the market for global recorded music. Compass Records was just a small music recording company in this industry. In 2003, its revenues were only $2.7 million. Although independent music-recoding companies such as Compass Records were so small, they still have opportunities to survive in this industry. “Because large companies have to have enough sales volume on a release to feed this huge infrastructure, yet 98% of all records sell fewer than 5,000 copies,” Said Brown, the founder of Compass Records. So those new faces, whose albums’ selling volume was low in general, were the opportunities for small companies like Compass Records.

Adair Roscommon, a new singer from Ireland, was interested by Compass Records. Brown and her husband knew that she was a good artist, but what they did not know is that whether they should produce and own her next album or simply license her finished recording. If Compass Records produce a master for Roscommon, then it could potentially generate revenues indefinitely, on the other hand, if they license her finished records, it is cheaper on the front end (they only pay Roscommon $3,000, much cheaper compared to $20,000 production cost), but there was a finite life to the future cash flows associated with the album.

Analysis:

Since there are new albums come out everyday, and one singer release his or her new album every two or three years, the life of an album is short because fans are tend to buy the new one comes out, so we assume that Roscommon’s next album can only sell for 3 years, and the first account for 75% of the sales, second year 15%, and third year 10%, no matter Compass Records own it or license it. Because of the return privilege, we also assume that Compass manufactured 30% more units than